02 Oct Tax rises?
I’m sure you’ve seen the various media coverage about the potential for tax rises in the future. Given the additional spending the government has had to do in the last six months (the furlough scheme, ‘Eat out to help out’ and the various business support measures) and probably the next six months it seems inevitable that the government is going to need to raise revenue.
Looking back to basic economics lessons, governments only have two main ways to pay for increased public spending – borrowing or raising taxes. One could argue that borrowing is the answer, but even though it’s currently relatively cheap for the government to borrow, they still need to show that they have a credible plan to repay the borrowing in the future. If not, it will be more expensive to borrow as the market will start to see the UK as a potentially unreliable country to lend to.
So, does it appear that taxes will have to increase? Probably, but any increase in taxation either next year or in the near future is going to need to be balanced with the need not to stifle economic growth.
If we accept that taxes are going to increase, in the next tax year or the tax year after that, at least we won’t be disappointed when they do. There’s a good chance that the general trend over the next few years is probably going to be upward – at least until our votes are needed again when we might see a reduction in taxes!
Obviously, we don’t know for certain which taxes will rise, but based on some of the recent speculation here are some thoughts on the possible main increases.
Income Tax and National Insurance (NI)
Probably the easiest and most obvious change to increase revenue is some form of increase to income taxes. This could happen either by altering bands, reducing allowances or just increasing the main rates. Politically this might affect the additional rate tax band first, but there could also be changes to NI as this tends to be less well understood by voters.
Any negative changes to income taxes (including NI) would have an impact on disposable income and the ability for families to spend and so might be unlikely in the near future due to the potential economic impact. However, a change to NI for the self-employed, to bring this in line with the employed, might be on the horizon.
Until any changes are known, it’s very difficult to take any significant planning steps but if increases are introduced then the current structure of savings, investments and rental properties, particularly for couples, might need to be reviewed.
Capital Gains Tax (CGT)
From what I’ve read, an increase or negative change to CGT is likely. It’s ‘low hanging fruit’ for the Chancellor and isn’t paid by the majority of voters. In the March budget, entrepreneur relief was significantly reduced, so we’ve already seen a willingness to increase CGT.
An additional way to increase CGT would be to revert back to the link to income tax rates, which used to be how CGT was calculated. However, this could result in an immediate increase of CGT from 20% to 40% or 45% for higher and additional rate taxpayers. CGT doesn’t bring in a large amount of revenue but also isn’t paid by many people so might not be seen as a vote loser.
We can only hope that any changes aren’t implemented immediately and are applied from a future tax year giving us time to plan.
If you agree that an increase in CGT is likely, then you could review your taxable investment portfolio to see if you have any unrealised gains that could be realised now and therefore pay CGT at the current rates.
A word of caution: be careful not to alter your investment allocation and the risk profile of your portfolio and also be mindful of transaction costs and the cost of being out of the market.
Any CGT increase is likely to also affect Trusts so if you are a Trustee you might want to carry out a review of the portfolio and how it is invested.
In recent years there always seems to be a rumour that pension tax relief will be changed to a set rate and not linked to a person’s taxable income. There are many reasons why if you were starting from scratch this is the system you would use, as it’s clear that the current rules benefit those paying higher rates of tax. The higher your taxable income, the higher the tax rate you pay and therefore, the more relief you receive.
However, given the current UK pension rules and systems in place, it would create a large administrative burden to change this and would take time to implement. We already have rules in place to restrict the amount of tax relievable contributions with the annual allowance and the tapered annual allowance for higher earners, so these could be altered or left alone.
Does the government have the will to change pensions again? They might, but if they do it’s likely to be implemented in a future tax year with plenty of warning so the pension industry can make the necessary changes.
In my opinion, an increase in the rate of VAT is unlikely as it would affect everyone and has an undesirable economic impact.
Inheritance tax (IHT)
The Office of Tax Simplification has previously suggested significant IHT changes, particularly on how IHT interacts with CGT, agricultural and business property relief, and lifetime gifts. Also, an all-party parliamentary group published an informal report on the reform of IHT in January 2020. These suggestions didn’t lead to any immediate changes, but the budget last March obviously needed to address other issues at the time. IHT is an area where simplifications could be made which might lead to higher revenue and/or could just make IHT easier to plan for and calculate.
Corporation tax (CT)
Corporation Tax is a source of considerable revenue for the government but also has an economic impact. Obviously increasing CT will increase revenue, but it does affect the general competitiveness of the UK. Currently the UK has lower corporation tax rates than Germany, France and Spain so there is some justification for an increase, but the government might wish to maintain the advantage of having lower rates to attract investment in the UK – particularly given Brexit.
There are obviously other tax rates, allowances and exemptions that could be altered to increase revenue and it seems likely that something will need to change. What we don’t know is which tax rises will be implemented or when, but I suggest we should be prepared for some changes over the next few years.
Please note that this does not constitute tax advice and any comments or observations on taxation are merely to provide general guidance. You should therefore take appropriate tax advice from a qualified tax adviser as tax treatment depends on an investor’s individual circumstances and may be subject to change.